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Economy set for better times whether Obama or Romney wins

The economy is on track to enjoy faster growth in the next four years as headwinds turn to tailwinds

Nov 5, 2012 @ 9:48 am

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Mitt Romney says Barack Obama's policies will consign the U.S. to an extended period of sluggish economic growth, at best. The president says his Republican challenger's plans will sow the seeds of another mammoth recession. Both are wrong.

No matter who wins the election tomorrow, the economy is on course to enjoy faster growth in the next four years as the headwinds that have held it back turn into tailwinds. Consumers are spending more and saving less after reducing household debt to the lowest since 2003. Home prices are rebounding after falling more than 30 percent from their 2006 highs. And banks are increasing lending after boosting equity capital by more than $300 billion since 2009.

“The die is cast for a much stronger recovery,” said Mark Zandi, chief economist in West Chester, Pennsylvania, for Moody's Analytics Inc. He sees growth this year and next at about 2 percent before doubling to around 4 percent in both 2014 and 2015 as consumption, construction and hiring all pick up.

The big proviso, according to Zandi and Yale University professor Ray Fair, is how the president-elect tackles the task of shrinking the $1.1 trillion federal-budget deficit. The Congressional Budget Office has warned that the U.S. will suffer a recession if more than $600 billion in scheduled government- spending reductions and tax increases -- the so-called fiscal cliff -- take effect next year.

Positive Signs

“There are a lot of things that are positive going forward for the economy,” Fair said. “Hopefully, we can get a handle on the deficit” without dragging down growth too much.

While concern about the threatened fiscal squeeze may hit gross domestic product this quarter and next, the expansion should pick up strength by the middle of 2013, said Eric Green, a Philadelphia-based fund manager at Penn Capital Management Co. GDP “will surprise to the upside,” said Green, whose firm manages $7.2 billion. “We could grow at a 3 to 4 percent rate over the next couple of years.”

Hiring in the U.S. increased more than forecast in October as employers looked past slowing global growth and political gridlock at home. In the last jobs report before tomorrow's election, the Labor Department said a net 171,000 workers were added to payrolls, beating the 125,000 median forecast of economists surveyed by Bloomberg.

'Defensive' Stocks

Shares of manufacturers, materials producers and energy and technology companies should rise as the expansion gains speed, Green said. More “defensive” stocks that aren't as affected by rising demand, such as real-estate investment trusts, health- care providers and consumer staples, won't perform as well. The Standard & Poor's 500 Index is up about 12 percent this year.

The U.S. also should benefit next year from a rebound in the rest of the world, according to Green, especially as China, the second-largest economy, “seems to be bottoming out.”

Chinese manufacturing expanded in October for the first time in three months, according to a purchasing managers' index compiled by the government. A similar gauge from HSBC Holdings Plc and Markit Economics posted the biggest gain since 2010.

While manufacturing in the euro area continues to contract, the region “can't be in a recession forever,” said Allen Sinai, chief executive officer of Decision Economics Inc. in New York. Economists surveyed by Bloomberg see the 17-nation group expanding 0.2 percent next year and 1.2 percent in 2014.

'Albatross' Deficits

U.S. growth will pick up only gradually during the next few years, to a little more than 3 percent in 2015, held back by an “albatross” of deficits and debt, Sinai said.

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., is more downbeat, emphasizing the structural challenges the U.S. faces rather than the cyclical forces Zandi highlights.

“The prospect is for 2 percent growth,” said El-Erian, whose Newport Beach, California-based company manages more than $1.9 trillion in assets. “The downside risks are larger than the upside risks.”

He argues that policy makers must tackle such “deep-seated problems” as elevated youth and long-term unemployment and a broken housing-finance system to enable the U.S. to grow faster. And while the president-elect will face an economy in much better shape than four years ago, he and the Federal Reserve will have less leeway to support expansion by employing fiscal and monetary policies, as they have already been loosened considerably, El-Erian said.

Optimistic Households

Households seem increasingly inclined to side with the optimists, preferring to see the economic glass as half-full rather than half-empty. Consumer confidence climbed in October to a more than four-year high as Americans took comfort from an improving job market, according to figures from the New York- based Conference Board.

Adam and Allyson Straight are among those looking ahead to more prosperous times. Adam, a 35-year-old official at the Georgia Dome stadium, and his 27-year-old wife bought a $227,000 three-bedroom house in Roswell, Georgia, on Oct. 26 after renting for the past 10 months. They moved in the following weekend and spent $2,500 on new living-room and dining-room furniture.

“I am optimistic,” said Allyson, a civil attorney. The economy “seems to be moving in a better direction.”

Romney disagrees. He told supporters in Ames, Iowa, on Oct. 26 that Obama has the nation headed in the wrong direction, with “trickle-down government policies that have failed us.

Better Future

''It's time for new, bold changes that measure up to the moment and that can bring America's families the certainty that the future will be better than the past,” he said.

The day before, Obama said Romney is the one proposing policies that have failed, such as lower tax rates for all Americans, including the wealthiest.

“We just tried that philosophy in the decade before I took office,” the president said in Cleveland, Ohio. “And we know what happened.”

Pent-up demand, more than presidential policies, will drive the expansion forward in the next few years, said Peter Hooper, chief economist at Deutsche Bank Securities in New York and a former Fed official. Households that put off purchases during the recession and its aftermath are starting to buy amid rising optimism about their prospects.

Retail sales jumped 1.1 percent in September as Americans snapped up goods from cars to iPhones, according to Commerce Department data. The gain followed a 1.2 percent increase in August, the best back-to-back showing since late 2010.

'Strong' Quarter

While U.S. sales of cars and light-duty trucks will suffer temporarily from the disruption caused by Hurricane Sandy, the industry “will have a strong fourth quarter and continue growing next year,” Kurt McNeil, vice president of U.S. sales for General Motors Co. (GM) in Detroit, said in a Nov. 1 conference call with analysts.

Easier credit terms are contributing to the rise in consumer spending. Banks reported that they continued to ease standards on auto loans and credit cards last quarter, according to a Fed survey of senior lending officers.

Commercial banks and savings institutions recorded a 21 percent rise in net income for April-June, the 12th straight quarter that earnings have risen on a year-over-year basis, according to the Federal Deposit Insurance Corp. in Washington. The 19 biggest banks have boosted equity capital by more than $300 billion since 2009, Fed Chairman Ben S. Bernanke said in a speech earlier this year.

Increasing Demand

Demand for auto loans and residential mortgages increased last quarter, the Fed survey found. Households are feeling more comfortable about credit after reducing their cumulative debt as a share of disposable income to 113 percent in the second quarter, the lowest in nine years, Fed figures show.

The housing market is one of the beneficiaries. New-home sales climbed 5.7 percent in September to the highest level in two years, based on Commerce Department data. Demand was 27 percent higher than a year ago.

“Clearly, demand conditions have changed for the better,” Richard Dugas, chief executive officer of PulteGroup Inc., the largest U.S. homebuilder by revenue, told analysts on Oct. 25.

The last time residential construction contributed to growth over the course of an entire year was 2005, when it accounted for 0.4 percentage point of the 3.1 percent increase in GDP. From 2006 to 2009, the homebuilding slump subtracted an average of 0.8 percentage point from the economy. Through the first three quarters of 2012, it's contributed 0.3 point.

Distressed Properties

“Housing typically adds 1 to 2 percentage points” in a recovery, said Dean Maki, New York-based chief U.S. economist at Barclays Plc, who worked at the Fed from 1995 to 2000. As the overhang of distressed properties is cleared away, “you may get a bigger kick from housing” in 2015 and 2016, he said.

Home values already are rising. Residential real-estate prices increased in the year ended August by the most in two years, according to the S&P/Case-Shiller index of property values in 20 cities.

The improvement in the housing market is alleviating one of the headwinds holding back the economy, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told reporters Nov. 1.

If concerns about the U.S. fiscal cliff and European debt crisis also abate, “there would be the impetus for more economic activity, more investment and more hiring,” he said.

While tomorrow's presidential contest “may have some influence on the decision of businesses,” more generally “I don't think the election results per se are going to have a noticeable effect on how this economy is evolving.”